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Competition on Russian Rail Cars Freight Transportation Market of Rail Cars under Different Kinds of Ownership

The main premise for the study conducted by IPEM was the discrepancy between the existing regulations and reality of the freight transportation by rail. In particular, it is the competition between rolling stock operators* (*operators in Russia, unlike those in European countries, do not own locomotives, such companies provide rail cars for freight transportation services and in some cases own cars) which emerged as a result of the railway reform. Moreover, even though the formation of freight transportation market was completed by the end of 2011, there is still no clear general definition for the service of cars provision in regulatory documents.

The following product markets were selected for the study (as the most significant in terms of amount of services provided and influence on freight owners): open cars markets, oil and petroleum tank cars markets, covered cars markets and platforms markets. The study covers 2H2011 and 1H2012.

The rate of market concentration was calculated using Concentration ratio (CR) and Herfindahl–Hirschman Index (HHI).

Main Results

• Concentration ratio of three out of four analyzed markets (transportation of open cars, oil and petroleum tanks, platforms) is low.

• Share of three largest companies in the open cars transportation market (PGK JSC, VGK JSC, NTK JSC) accounts for 43.7%, Herfindahl–Hirschman Index is 817HHI5. The car component of the tariff is state-regulated in less than 20% of open cars.  

• Share of three largest companies in the oil and petroleum tanks transportation market (Transoil LLC, PGK JSC and TLC JSC) accounts for 38.4%, Herfindahl–Hirschman Index is 716HHI738. Prices for transportation are fully determined by market.  

• Share of three largest companies in the platform transportation market (RZD JSC, PGK JSC, Severstal JSC) accounts for 34.7%, Herfindahl–Hirschman Index is 754HHI782.

• Concentration ratio of covered cars transportation market is middle. Share of three largest companies in this market accounts for 68.4%, Herfindahl–Hirschman Index is 754HHI782. However the level of competition in this market cannot be considered low as the freight transported in covered cars can also be transported by alternative means of transport – by road, air and inland water transport.

The study also analyses entry barriers into these markets. There are three types of barriers defined by IPEM specialists: economic barriers, administrative barriers, presence of railway operators which are parts of vertically integrated companies.

As for economic barriers, the study analyzed different ways of market entry. Purchase of new cars is the most costly way to entry the market and it requires significant initial capital. At the same time it is common for new market players who don’t own rolling stock to lease cars from operators and industrial companies. Such kind of agreement usually includes prepayments and other lump sum payments, but still it is one of the least expensive ways to entry the market. Generally those operators who tend to occupy a large market share prefer leasing agreements with financial companies. According to financial leasing agreements an operator receives the ownership of cars at the end of a contract while it does not have to bear lump sum expenses.

According to IPEM estimations, financial and organizational costs of overcoming the barriers are low. The study concluded that in general there are no significant barriers for new players to entry the analyzed markets. Consequently, freight cars transportation markets can be considered as competitive as the entry conditions for new companies are quite favorable.

Key Findings 

• There are prerequisites for regulative changes in the analyzed markets with formed competition

• As for the present state of freight transportation markets, the state regulation can be limited and cover only infrastructural and locomotive components of the tariff.

• It is considered feasible to shift the regulation of freight cars transportation market from antitrust legislation to the Federal law “On competition”.

 

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For the full version of the study or any additional information please contact: +7 (495) 690-14-26, ipem@ipem.ru